Harmonising Mudarabah practices in conventional regulatory regime in Tanzania

Abstract

Mudarabah is a common Islamic bank product practiced by Islamic banks in Tanzania even though its practices seem to be vague due to the lack of harmonisation between banks. This situation is a result of lack of regulatory, infrastructure and institutional frameworks that could lead to a harmonized stance of this product. This product has been studied in order to explore the current practices under conventional regulatory regime. The main objective of this study is to investigate the conventional regulations influencing Mudarabah in order to develop a harmonised Mudarabah practice model. This objective was achieved by interviewing Islamic bank stakeholders including bank managers, sharia board members and customers of the selected Islamic banks. The study applied qualitative methodology based on multiple case studies in data collection and analysis. Twenty-five participants were interviewed including eleven bank managers, three sharia board members and eleven bank customers from three cases triangulated with document review. Thematic data analysis was employed to come up with the broad themes that form a basis for discussion. Several barriers and challenges have been found from the results of the analysis which hinder the efficiency of Mudarabah practices. Irregularities of regulations and policies is the major challenge found to obstruct Mudarabah practices as Mudarabah is not governed by sharia regulatory framework. Similarly, existing contradictions between a country‘s financial regulations and policies are seen as a challenge to Mudarabah practices. Apart from regulatory challenges, infrastructure of the country is not effective enough to allow efficient practices of Mudarabah as Islamic capital market products are not available to allow a wide range of investment for Mudarabah mobilised funds. However, Islamic banks are forced to insure Mudarabah deposits under conventional insurance to the deficiency of Takaful in the country. Despite the limitations provided in this research, the research contributed theoretically and practically to the understanding of Mudarabah practices in conventional regulations in Tanzania. Practically, the research develops Mudarabah harmonisation model to be adopted by Islamic banks, regulators or policy makers where efficient practices can be attained in a conventional regulation. The model emphasizes appropriate regulations to govern Islamic banks that will ensure sharia compliance of the banks. Theoretically, the study provides an understanding of the practices of Mudarabah that can meet conventional regulations as well as comply with Islamic norms and ethics. Implication of the study for banks‘ management is to encourage Islamic banks to form a union in order to form central sharia board and Takaful services for depositors. Similarly, the study will foster transparency of bank activities to stakeholders and enhance customer knowledge on Mudarabah operation and profit distribution. Henceforth, regulators have to harmonize country‘s regulations and policies with Islamic sharia for the betterment of Islamic banking performance. Future studies have to examine the level of sharia compliance in Islamic banks in Tanzania. Apart from Mudarabah, future studies have to explore the performance of other Islamic banking products under conventional regulations of Tanzania. In addition, future studies could examine the eligibility of a central bank as a sole regulator in regulating Islamic banking.